Cabot Micro to Buy KMG for $1.2 Billion in Chip-Sector Expansion

(Bloomberg) -- Cabot Microelectronics Corp. agreed to buy KMG Chemicals Inc. for $1.2 billion in cash and stock, making its largest acquisition ever in an effort to strengthen its position as a supplier to the semiconductor industry.

The purchase adds KMG’s high-purity chemicals to Cabot’s polishing pads and slurries used to make computer chips, which go into in everything from tablets and smartphones to cloud-computing servers. The deal implies a value of $79.50 a share for KMG, according to a statement by the companies, a premium of 19 percent over Tuesday’s closing price.

Chief Executive Officer David Li is making the purchase in an effort to close the gap with competitors Entegris Inc., Versum Materials Inc. and Platform Specialty Products Corp. The deal -- which is projected to boost revenue more than 80 percent to $1.03 billion -- will give Cabot greater scale possibly to make further purchases in the electronics-materials market, the Aurora, Illinois-based company said in a presentation Wednesday.

Electronic materials will generate about 82 percent of revenue from the combined company, with 12 percent from chemicals used by pipeline operators and 6 percent from wood treatments and other products.

KMG jumped 16 percent to $77.25 at 10:42 a.m. in New York after climbing as much as 18 percent, the most intraday since December 2015. The shares had climbed 1.2 percent this year through Tuesday. Cabot dropped 6.7 percent to $113.27.

Disappointing Price

Michael Harrison, an analyst at Seaport Global Securities LLC, said he was “disappointed’’ in the purchase price and that another bidder might emerge. Harrison has a price target of $85 for KMG.

Cabot plans to cut about $25 million of expenses within two years to bring profit margins of the combined company to 31 percent. KMG’s current margin is 26 percent, while Cabot’s is 31 percent.

KMG stockholders will receive $55.65 in cash plus 0.2 Cabot share for each share of KMG stock. The companies value the purchase at $1.6 billion including debt, representing a multiple of 10.9 times adjusted earnings before interest, depreciation and amortization, including planned cost cuts.

Cabot expects to issue about 3.25 million shares to KMG investors. It intends to fund the transaction by issuing $1.1 billion of debt, including the refinancing of KMG bonds, and using $150 million in existing cash.

The deal is projected to add to Cabot’s free cash flow and earnings in its first year, excluding acquisition and integration-related costs. Cabot expects the purchase to close near year-end, subject to the approval of KMG shareholders.

KMG, based in Fort Worth, Texas, has 750 full-time employees at 19 sites in North America, Europe and Asia.

To contact the reporter on this story: Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson, Susan Warren

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